New government increases public sector pay and low-wage earners' income

Hungary's new Socialist-led government has introduced a major package of incomes policy measures. From 1 September 2002, public service employees’ pay will be increased by an average of 50%, while earnings up to the national minimum wage will be exempt from personal income tax, which will raise the income of low-wage earners by around 12%. The amendments to the tax law will increase net wages not only for those earning the minimum wage, but also for a larger group of employees earning less than the national average wage.

Following parliamentary elections held in April 2002, the victorious Hungarian Socialist Party (Magyar Szocialista Párt, MSZP) formed a coalition government with the liberal Alliance of Free Democrats (Szabad Demokraták Szövetsége, SZDSZ). The MSZP campaign programme promised comprehensive incomes policy measures within the first 100-day period following an election victory, and it has duly issued a package of such measures. This package has been passed by parliament and will come into force on 1 September 2002.

The incomes policy package passed by parliament includes various measures affecting state-run social security and policy systems - such as a one-off extraordinary supplement for pensioners and increases in family allowances and grants for university students. However, the measures which will affect most working people and have the greatest impact on the functioning of the labour market are undoubtedly a 50% pay increase for public service employees and exempting the national minimum wage from personal income tax.

Increasing the net value of the national minimum wage

Since the Hungarian economy recovered from the 'transformation recession', a pivotal element of both the government’s incomes policy objectives and trade unions' demands has been closing the 'income gap' with the European Union Member States. Therefore, the previous centre-right government doubled the gross value of the national minimum wage, which is now HUF 50,000 (EUR 200) per month. Due to this substantial increase, the minimum wage currently amounts to 44.7% of the average wage, which according to the Central Statistical Office (Központi Statisztikai Hivatal, KSH), was HUF 111,739 (EUR 447) per month in the first quarter of 2002. However, the minimum wage has hitherto remained subject to 18% income tax and a social security contribution, reducing the net monthly value of the minimum wage to HUF 37,700 (EUR 151).

The steep increase in the minimum wage under the previous government was heavily criticised by employers’ associations and a number of trade unions, which feared that in certain low-wage manufacturing industries this would result in a loss of competitiveness and eventually cause job losses. In the debates over the level of the minimum wage, employers and some unions always proposed cutting taxes on wages below this level.

The new government had promised in its election programme to exempt the minimum wage from income tax, embracing the proposals put forward by the social partners. In order to accomplish this commitment, the government has increased the amount of the 'tax allowance', a special provision in the tax law designed for the exclusive use for low-wage earners. Under the personal income tax law, employees are currently eligible to a tax allowance of up to 10% of their earnings and not more than HUF 3,000 (EUR 12) per month. This preferential allowance scheme is limited to low-income employees. The allowance scheme can be used fully on annual income up to a ceiling of HUF 1.2 million (EUR 4,800), and a gradually decreasing allowance is then applicable on annual gross income up to HUF 1.4 million (EUR 5,600). As of 1 September 2002, the rate of the allowance will be increased to 18%, which is the exact equivalent of the personal income tax rate in the lowest income bracket. At the same time, the maximum monthly tax allowance will be increased to HUF 9,000 (EUR 36) and the annual gross income to which the allowance applies will be increased to HUF 1.533 million (EUR 6,132).

As social security contributions remain unchanged, the HUF 50,000 (EUR 200) monthly national minimum wage will in future be worth a net HUF 43,700 (EUR 175). Furthermore, the tax changes mean that from 1 September 2002 practically all employees under the earnings ceiling for the tax allowance, and not only the minimum wage earners, will enjoy a net monthly wage increase of HUF 6,000 (EUR 24). Overall, the income of low-wage earners will be increased by approximately 12%.

50% increase in public sector pay

The fact that public sector wages lag behind the rising level of wages in the private sector has long been one of the severest problems of the Hungarian wages system. According to the Ministry of Employment and Labour (Foglalkoztatáspolitikai és Munkaügyi Minisztérium, FMM), public service employees earn roughly 60% of the wages in private sector jobs requiring similar qualifications. The wage gap is especially high for employees with a university degree. Previous governments used a 'targeted' approach to address this issue and increased substantially the pay of relatively small groups, such as judges, public prosecutors, armed forces personnel and, most recently, civil servants working in public administration. Although the Law on Public Employees originally introduced a unified wage scale for all public service employees in 1992, these selective government measures subsequently introduced gradually various 'multipliers' (ranging from 1.05 to 1.43) applied to this scale for different groups of employees.

The public sector wage scale has also been undermined by the recent substantial increase in the national minimum wage, because the wage brackets of public employees were not changed proportionally. As a consequence of the depressed public sector wage scale, the earning differentials between unskilled employees and young university graduates practically disappeared. According to the Union of Public Archives and Public Education Workers, (Közgyűjteményi és Közmüvelődési Dolgozók Szakszervezete, KKDSZ), 65% of public employees earn only the minimum wage. That is why the MSZP campaign programme not only promised a 50% pay increase in the public services, but also envisaged the restoration of the original public sector wage scale set by the 1992 law, and adopted an earlier initiative of the SZDSZ, the junior coalition party, to introduce a minimum gross monthly wage for university graduates of HUF 100,000 (EUR 400) .

The new government has thus amended the Law on Public Employees, revising all the brackets in the statutory wage scale table. Pay in the lowest category (A1) will be equal to the national minimum wage, while pay in the lowest category for public service employees with a university degree will be HUF 100,000. Employees in the top bracket will earn 4.77 times more than the national minimum wage. A separate wage scale has been designed for higher education and research institutes, in which salaries will increase with the level of educational attainment. At the top of the scale, the monthly pay of a university professor will be set at HUF 360,000 (EUR 1,440), which is 50% higher than the salary in the highest public service employee category.

The new wage scale will be introduced on 1 September 2002 and the necessary financial resources will be provided to the public service institutions by the state central budget. The budget also provides financial support for public schools run by churches and private foundations in order to cover the additional costs of the new wage scale. Nevertheless, the 50% overall increase does not mean that each public employee will enjoy the same raise. As the earlier 'multipliers' are phased out, employees prioritised by previous measures, along with employees in lower brackets receiving the increased minimum wage, may expect a lower pay rise than the average. Similarly, smaller groups of employees who now receive certain wage supplements may lose these supplements.

Commentary

The new government’s incomes policy package has given a generous increase in income to public service employees and increased net earnings not only for employees at the minimum wage level, but for a large group of people earning less than the average wage. These increases are not just the popular measures of an incoming government, but address a problem of lagging public service wages which has been mounting for over a decade. The substantial pay raise for public employees has also created the opportunity for legislation to introduce a unified regulation for public sector employment (similar attempts between 1994 and 1998 failed, basically due to the significant disparity between the wages of public employees and of civil servants).

Trade unions active in the public service sector have welcomed the 50% average wage increase and expressed their hope that this one-off government measure will be followed by a long-term agreement between the government and the unions, in order to design a long-term incomes policy for the whole public sector. However, a long-term agreement between the government and public sector unions on public sector/private sector wage parity, or to close the gap with EU wages, is still far away.

As far as the exemption of the minimum wage from income tax is concerned, both trade unions and employers' organisations have welcomed the government’s new incomes policy, as it does not harm the competitiveness of low-wage industries. However, opposition political parties and right-wing oriented media have criticised the technique of raising the net minimum wage, as this affects only those in paid employment and excludes the self-employed. Some neo-liberal economic observers, most notably Lajos Bokros, a former Hungarian finance minister, have criticised the incomes policy package, in general, on the grounds that it is not justified by productivity increases, and particularly the public service sector pay raises, which are seen as making it more difficult to carry out inevitable structural reforms in public services.

Although the government's one-off incomes policy package has redressed the most painful lags in pay development in the public service sector, still missing is the elaboration of a long-term policy for the whole public sector, in terms of both wage development and carrying out a necessary major reform of the sector. In the forthcoming months, the government and unions in the public sector should build up the appropriate institutional framework of negotiations in order to develop a consensual strategy to address these long-term issues in the context of tasks related to Hungary's forthcoming accession to the EU and the necessary measures to enable it to join EU Economic and Monetary Union (EMU). (László Neumann and András Tóth, Institute of Political Science, Hungarian Academy of Science)

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